Is Financial Repression Here to Stay?

Can savers really expect the old normal in financial markets – positive long-term interest rates on government bonds – to return? There are two powerful reasons why it may be unreasonable to expect that it ever will.

LONDON – There are several definitions of financial repression – and the repressors and the repressed tend to see things differently. But what financial repression usually involves is keeping interest rates below their natural market level, to the benefit of borrowers at the expense of savers. The borrowers are often governments, and in many emerging economies the state has funded its extravagances by paying bank depositors derisory rates of interest.

But in the last seven years, since central banks in developed countries pushed down their base rates almost to zero, we have seen a First-World version of financial repression. A recent research report from the insurer Swiss Re describes who has won and lost as a result, and questions the sustainability of the policies pursued by institutions such as the United States Federal Reserve, the European Central Bank, and the Bank of England.

The report’s argument is that while the stated motivation for ultra-loose monetary policy might be to guard against deflation and promote economic growth at a time when demand is weak, low interest rates also help governments fund their debt very cheaply. Moreover, as we enter the eighth year of aggressive easing, unintended consequences are starting to appear – notably asset-price bubbles, increasing economic inequality (as wealthier investors able to hold equities benefit at the expense of small savers), and the risk of higher inflation in the future.

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